May 25 (Bloomberg) — David Siniapkin, a postal worker in York, Pennsylvania, uses some of his retirement money to trade options. After three years and being down as much as $10,000, he’s broken even. Siniapkin, 46, said Continue Reading

In hindsight the US Federal Reserve and the US Treasury Department seem to have done a masterful job in distributing the avalanche of supply from historic deficit spending. In fact, Treasury prices seem to be getting a lift in the wake of periodic auctions, but that is probably largely a function of the lack of attractive alternative investments. We do think that US Treasury auctions have been benefiting from an “invisible hand” which could take the form of direct buys by the US government that are later distributed into the market in smaller increments. It is also possible that the US is soliciting the help of foreign entities, many of which have a vested interest in preventing a US debacle. However, we also think that the need to support the auctions will become less critical as the US government and US financial institutions get a grip on the trouble spots. We also think that a certain amount of Treasury buying interest is the result of lingering concerns of a failed recovery. In fact, the Chinese recently suggested that their ongoing interest in US Treasuries was economically based and not politically based. In other words, the Chinese were looking for a certain yield and the US Treasuries are providing that return. However, as the prospect of recovery improves it could increase the attractiveness of alternative investments and in turn pull money away from Treasuries. In our opinion the US will be able to keep certain interest rates down but that all rates won’t be held down once there is positive economic momentum. While it might be considered anecdotal evidence, it was noted recently that Miami condo sales showed a significant jump, which in turn prompted some real estate analysts to suggest that the excess supply in that area could be worked off in a couple of years. For most of the last two years there have been very few real estate experts who would hazard a specific time for a recovery in Florida real estate. Nonetheless, as we mentioned in the Commodity Outlook, we suspect that the next US Non Farm payroll report might show a better than expected reading, and that in turn could leave US Treasuries vulnerable to a compacted correction. With June bonds last week reaching their highest level since early December, it would seem like the Treasury market is at least partially factoring in a failure to recover or at least a much longer and slower recovery than one might have expected at the beginning of the year. Certainly evidence that inflation remains low was cause for some of the gains last week, but we challenge the bulls to feel good about their positions going into the next Nonfarm Payroll reading, especially if June bonds are priced above the 118-00 level! A good reading, rapidly rising energy and base metals prices and confidence in a global recovery could easily set the stage for an April slide in bond prices of 4 points! Trading Strategy: Sell 1 June bond at 118-10 limit, with an objective of 114-31. Risk the trade to a close above 119-09. That translates Continue Reading

The sugar market has been on a wild ride the past month. The market is shifting from one of the tightest stocks/usage periods on record to a more normal setup for the coming year. But the first leg down may have been too far, too fast. July sugar fell 20.6% off of the February high into the March 2nd low. Open interest peaked at 897,343 contracts on February 4th and had fallen to 741,780 by March 2nd. This massive long liquidation trend leaves the market oversold as of early March. Looking forward, Brazil’s sugar production should jump 8-10% this year. The crush season should get started in late March/early April, and this should help ease the global supply tightness. On top of the many customers who will be awaiting new crop Brazil sugar, the spike up in ethanol prices inside of Brazil could spark a need for increased ethanol production early in the season. The real key to avoiding another world production deficit for the coming year will be weather in India and China, as both regions have seen sub-par crops the last two years. China production is expected to be near 11 million tonnes in 2010, down from 12.43 million last year. This could leave a large production deficit for the second year in a row, and China has been selling state owned reserves since late 2009. We would not be surprised if China emerges as a strong importer for the coming year. The US may also be a strong importer in the months just ahead, as stocks are tight. India’s consumption has been about 7 million tonnes above production for each of the past two years, so the market will become Continue Reading

While the soybean complex may be inundated with too much supply, the focus of attention for the corn market over the near term will be on longer term demand factors and of course on the outlook for planted acreage. In its baseline projections issued in late 2009 in preparation for the budget process, the USDA put corn planted area for the 2010/11 season at 88 million acres, up from 86.5 million this past season. This estimate will be updated in the USDA Outlook Forum for February 18-19 (released after this writing), but there is a general market opinion that corn planted area will increase by 2-4 million acres over that number, with some estimates even higher. Traders seemed to dismiss the preliminary baseline projections from the USDA, but we should point out that while there are more than 2 million acres coming out of the Conservation Reserve Program and winter wheat plantings were low, the baseline projections for the 8 major row crops are projected at just 247.1 million acres, down from 248.9 million last year and from 253.1 million acres in 2008. If the baseline numbers are close to correct, the trade may be overestimating total plantings for the coming season. The enclosed table shows several “what-ifs” for the corn outlook for the 2010/11 season if we assume that producers will plant 4 million more acres this spring than they did last year. We have also assumed a slight increase in usage for the coming year due to the surge in ethanol production and reassuring reports from the EPA last month that helped to confirm that corn-based ethanol growth is likely to continue over the next several years. In November, the US used 362.4 million bushels of corn to produce ethanol. In order to reach the new USDA forecast of Continue Reading

Here is a short list of excellent books for new and intermediate level traders. Book Reader: The Kindle Kindle Wireless Reading Device (6″ display) Kindle DX Wireless Reading Device (9.7″ display) Trader Interviews: Market Wizards: Interviews with Top Traders The New Market Wizards: Conversations with America’s Top Traders Trading Psychology: The Daily Trading Coach: 101 Lessons for Becoming Your Own Trading Psychologist Continue Reading

(as published in Active Trader magazine)

In the last article we started looking at the concept of change and how it affects an option’s fair value. Specifically we used discussed the delta and the gamma – concepts used to quantify the behaviour of an option given a change in the underlying market itself.

In this article, we move a little further down the track and look at how changes in other factors can affect an option. For any option trader, it is interesting information, but more importantly essential in understanding the risk in a position.

In the last issue noted four factors that can impact the fair value of an option position. These are:

1. Market price
2. Time to expiry
3. Volatility
4. Interest rates.

Changing levels in the underlying market price is what we looked at last time. Here we will look at the rest, starting with time.

Time Decay and Theta

Continue Reading

(Originally published in Active Trader magazine)

What a boring game all this would be if option prices showed no fluctuations! The price, or premium, of an option is constantly changing for whatever reason. As an options trader you must be prepared, armed with the knowledge of how an option price can react in certain scenarios. You can look at that from a reward or a risk perspective.

If you are relatively new to options, you may have heard the terms “delta” or “gamma” or several of the other Greek letters. These terms are used to measure how an option price can behave in certain environments.

This two part article (this being part one) seeks to explain “the Greeks” and more importantly give perspective to their relative importance in day to day option trading.

Continue Reading

Not long after options became available, there were the seminars and the books and the systems that come with any new financial product. These things tend to come from ‘experts’ with opinions as to which option strategies are the best: Continue Reading

(Note this article was first written in 2003, so the data is a little old but the concepts remain the same.)

The concept of hedging has always been a controversial one. There are some investors that would not enter the market without it. Then there are others that just do not see the point of hedging and that the whole exercise is just too expensive.

Before being able to develop an opinion however, one must know the options. That is, one must understand what hedging actually is. There are a greater range of hedging strategies out there than just selling futures or buying a put. Some strategies will have an outright cost, like buying a put. Other strategies may cost less but instead somehow limit your overall return.

You can see this in some capital guaranteed products in the market. Some capital guaranteed products will put a cap on your potential returns. That in essence can be considered the cost. Now as long as you are happy with this cap, then this type of product may suit you.

So too with options. That is, you can use options to place a stock or portfolio hedging strategy at the cost of capping your upside.

Most people are familiar with buying puts as a hedging strategy. The put works much like an insurance contract. Sometimes however (maybe even a lot of the time) this cost of insurance is too high. A hedging strategy that simply involves buying put options may turn out to cost more than it’s worth.

Buying puts however is not the only strategy around to protect your stock or total portfolio. This article will show you a very simple options strategy that can be used not only for a cheap speculative play, but as a low cost and effective hedge.

Let’s say you have a portfolio of German shares. Up until about late December, we have seen some pretty good gains as measured over the course of the year or even just the previous few months (see Figure 1).

After gains like these, it would be quite reasonable to build some protection against a fall in the market. One thing to consider is a hedging strategy using options.

Figure 1: shows the DAX Index. Some great gains over 2003 could leave the average investors thinking it may be time for a correction.

Source: eSignal (www.esignal.com)

Current volatility, while not at its lowest level, is still quite low and therefore the first option would be to look at buying puts. It is a simple strategy Continue Reading

The thing about options is that there are so many terms and concepts to learn and you’ll find even an introductory level article will be full of them. It means these things called “options” can Continue Reading

The wheat market has been a featured mover to the upside of late. Traders who have concentrated on the genuinely bearish world and US supply fundamentals are licking their wounds and wondering why the rally is still going strong. The Continue Reading

With the US Federal Reserve backed into a corner by a mountain of toxic assets and soaring US deficit spending, the easy way out is to invite, foster and perhaps even beg for inflation. With the world currency markets, foreign Continue Reading

As a trader, author, etc I often get asked what are the best ‘getting started’ books on options trading. I have literally boxes and boxes of books on options trading. The collection includes everything from the basic Continue Reading

Any one of the upcoming US non-farm payroll reports could bring forth a historic event in US Treasury prices! With the US Federal Reserve standing by their intentions to hold US interest rates down and recent housing numbers showing a Continue Reading

Q: Aren’t options spreads cheaper to trade than futures spreads? A: This question is based on a misunderstanding of the mechanics of futures and options trading. Options: With options, including options on futures, you pay a “premium” when you buy an option and receive the premium when you sell an option. If you pay 10 cents for an option that 10 cents is debited from your trading account. If you sell an option for 15 cents, that 15 cents is credited to your account. Taking the example further, suppose these two options make up a spread. That is, you buy one option for 10 cents and sell a different option for 15 cents. The net amount (5 cents) is credited to your account. Futures: For futures contracts, it’s different. The price paid or Continue Reading

Question#1: Is it too dangerous to leg in to a butterfly spread trade? Answer: The answer to that is yes and no. I’m not meaning to be vague, but sometimes it can be risky and other times it can be beneficial. That said, since the butterfly is made up of two spreads, it’s not a terrible idea to enter the trade as two separate spreads. I do this when placing condor/butterfly spreads on the S&P for example. Despite the S&P options market being very liquid, I find it easier to get a fill if I place two spread orders (vertical call spread and vertical put spread). Question #2: I am familiar with option strategies. Can I apply most of the option strategies with the futures like there is an option strategy with is called butterfly and you did the same now with futures? Continue Reading

The CME produce some really good educational content on options. Here is a quick and easy reference guide for options strategies. It’s a handy thing to bookmark if you are new to all that ‘options stuff’. Continue Reading

NEW: Guide to Futures and Spread Trading. 3rd Edition

This comprehensive ebook is designed to help you understand and master the fundamentals of futures spread trading. It includes over 40 pages and is organized in a straightforward, easy to follow Continue Reading

$900 seems like a key level for Gold. The chart shows several points of resistance and support. Generally speaking the more a level is tested either as support or resistance, the most significant a breakaway becomes.

Does this forecast near term direction? Not quite. But it does imply a breakaway within the next week or so will be followed by a decent move.

The first thought then is a long straddle/strangle, but implied volatility is extremely high. A 77-day 850/950 long strangle for example currently costs $75. In times like this, one would be better off buying/selling futures on a breakout. One could even throw in a short strangle with distant strikes to pay for the stop loss on the futures. There is always an angle…

The concept of selling options to receive a premium is pretty straightforward but careful consideration must be given to choosing the strike and monitoring the position.

While it is not recommended, a position with limited liability, such as buying options, can be left unmonitored if you are happy with the initial risk. However, a position with unlimited liability, such as short options, must never be forgotten. As motor sports commentator Murray Walker would say, “Anything can happen, and it often does”.

What follows may not be the only rules for selling options, but they are a great place to start.

Read the whole article at: ProTraderDigest

This is a sheet for writing out orders. Its design is very similar to that used by many brokers for recording phone orders from customers. It’s a handy little tool that is simply a good way to keep a record of when, and with whom, you placed an order and of all the trade details. It will also reduce possible mistakes when placing orders over the phone. Keeping good records is a habit well worth developing.

As with the trade plan, you might like to print out a dozen or so, bind them up and keep them close to your PC.

Download here.

Popular belief: 80-90% of options expire worthless therefore it is better off being a net seller that a net buyer of options at any time.

How many times have you read this? I know I have read or heard it dozens of times. “80% of options expire worthless therefore it is better to be an option seller”. I trade these things for a living and this statement has confused me. My first thought was how can it be possible? If you consider that at any one time about 50% of all options are in-the-money and 50% are out-of-the-money, and only out-of-the-money options can expire worthless, then could not the figure be closer to 50%?

Read the whole article at: ProTraderDigest